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Political Worries Keep Europe On Edge As Earnings Push Stocks Higher; US Futures Unchanged

In a mostly quiet Wednesday session, Asian stocks rose overnight along with European bourses, which were led higher by miners after Rio Tinto posted higher profits for the first time in three years and a bigger-than-expected dividend, while India’s Sensex extended declines after the central bank unexpectedly left rates unchanged. US futures were little changed as oil continued to fall after API reported a huge inventory build in the last week.

Trading around the globe continues to be directionless, with moves in financial markets punctuated by midday reversals, underscoring a lack of conviction as investors continue to look for more details from the Trump administration on promised spending increases and tax cuts at the same time that data continue to paint a mixed picture on the pace of inflation in developed markets. Corporate earnings have provided some relief for investors, with companies including Tata Steel Ltd. and Rio Tinto showing strong results.

Continued political uncertainty ahead of European elections prompted investors to sell the euro and kept lower-rated euro zone debt under pressure on Wednesday while the price of safe-haven gold hit three-month highs. Three months before the final round of France's presidential election, investors are concerned about the strong showing of far-right candidate Marine Le Pen, who has promised to take France out of the euro zone and to hold a referendum on European Union membership. Several other front runners are in disarray.

"The French political noise has brought the euro down and that has given the dollar a reprieve," said Gavin Friend, a strategist with National Australia Bank in London.

French 10-year government bond yields dipped 1bp to 1.1% but held close to 17-month highs touched on Monday. Low-risk German equivalents fell 2.3 bps to 0.34 percent. This pushed the gap between the two yields to more than 78 bps, its widest since November 2012.

"With 2 1/2 months to go until the first round of voting, which means there is plenty of time for things to change, it is hard to see spread volatility subsiding for the time being,” UniCredit fixed income analysts wrote in a note. The same dynamic was relevant in Italian bonds where the premium investors demand to hold low-rated Italian 10-year bonds rather than German Bunds hit its highest since 2014.

To hedge political risk, investors also bought gold: the yellow metal hit a three-month high of $1,237.90 an ounce.  The euro currency weakened a further 0.2 percent to $1.0653 after a sharp fall on Tuesday. According to Reuters, options markets show the biggest bias for euro weakness against the dollar since late June. As Bloomberg adds, implied volatility on the euro climbed on Wednesday amid growing political worries about the continent.

As noted above, the dollar, whose predicted path higher has been interrupted lately by uncertainty over U.S. President Donald Trump's economic policies, rose 0.2 percent against a basket of other major currencies. Investors are still waiting to see whether Trump makes good on his campaign pledges to cut taxes and boost spending. "Markets know that if Trump was to come out and start talking about tax reform and infrastructure spending, the dollar would go up. The dollar rose a long way at the end of last year, it has come back, now we are sitting around waiting for the next steer."

In stock markets, the European STOXX 600 index rose 0.6% while Britain's FTSE 100 fell 0.2%. The STOXX basic resources sector rose nearly 2% driven by  Rio Tinto which gained 2.1% after it announced it will pay a much higher dividend than expected and buy back $500 million of shares after higher iron ore prices boosted profits, while fellow miner Anglo American added 2.3% . MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.2% in late trade, after spending most of the session in negative territory. Japan's Nikkei rose 0.5 percent. U.S. stock futures were up less than 0.1%, pointing to a flat start on Wall Street.

Oil prices fell after American Petroleum Institute data on Tuesday showed a larger-than-expected rise in U.S. crude inventories and after signs of slowing demand growth in China. "The API delivered a Goliath crude inventory number ... The second highest on record. The reaction was predictable as the herd, already nervous from the previous day's price action, turned en masse and ran off the cliff," said Jeffrey Halley of futures brokerage OANDA in Singapore. Copper prices rose 1.7 percent to just shy of $5,900 a tonne after the world's biggest mines said they planned to cut output due to strikes and other issues. BHP Billiton said it would halt output at Chile's Escondida mines, the world's biggest, and Freeport-McMoRan warned it would scale back activities at its Indonesian mine.

In major rates markets, yields on 10Y TSYs held below 2.40 percent, after crossing that threshold for the first time in two weeks on Tuesday. Portugal’s 10-year debt yield fell 12 basis points while French benchmark yields dropped three basis points and Italy’s fell six basis points. Indian bonds tumbled after the central bank unexpectedly left rates unchanged, defying market expectations for a cut to counter slowing inflation. Yields on Greece’s two-year notes advanced for a fourth day, climbing eight basis points to 9.80 percent.

Allergan, Time Warner, Whole Foods, Cognizant among companies expected to report earnings today.

Bulletin Headline Symmary from RanSquawk

  • On a particularly subdued Wednesday morning, European equities trade flat across the board with earnings dictating play
  • FX markets remain quiet this morning within the G7 amid a lack of fundamental catalysts
  • Looking ahead, highlights include RBNZ interest rate decision and DoEs

Market Snapshot

  • S&P 500 futures little changed at 2,288.90
  • STOXX Europe 600 up 0.6% to 364.84
  • German 10Y yield fell 0.9 bps to 0.341%
  • Euro down 0.3% to 1.0649 per US$
  • Brent Futures down 0.7% to $54.66/bbl
  • Italian 10Y yield fell 0.9 bps to 2.367%
  • Spanish 10Y yield fell 3.5 bps to 1.736%
  • Brent Futures down 0.7% to $54.66/bbl
  • MXAP up 0.3% to 142.94
  • MXAPJ up 0.2% to 456.91
  • Nikkei up 0.5% to 19,007.60
  • Topix up 0.5% to 1,524.15
  • Hang Seng Index up 0.7% to 23,485.13
  • Shanghai Composite up 0.4% to 3,166.98
  • Sensex down 0.2% to 28,289.92
  • Gold spot up 0.2% to $1,235.67
  • U.S. Dollar Index up 0.3% to 100.58

Top Overnight News

  • Gilead Sciences Inc.’s massive hepatitis C franchise is fading, projecting that sales this year could be just two- thirds of what investors had been expecting
  • Energy Transfer Partners LP is set to win the final go-ahead for completion of the Dakota Access Pipeline after President Donald Trump asked for a speedy approval
  • India’s central bank unexpectedly left borrowing costs unchanged for a second straight meeting and signaled that its interest-rate easing cycle is coming to an end
  • Stan Druckenmiller said he bought gold in late December and January, reversing the sale he made after the U.S. presidential election.
  • Walt Disney Co. Chief Executive Officer Bob Iger said he’d remain with the company beyond his scheduled June 2018 retirement if it’s good for the company
  • Singapore-based Spark Systems will start a live trial of its currency platform in March, hoping to lure traders with lower fees than existing offerings in the city

Asia equity markets traded choppy after a lukewarm trading session in the US, where the NASDAQ Comp printed fresh record highs, but upside in the other majors were limited by weakness in oil. ASX 200 (+0.5%) outperformed its Asia counterparts amid rising iron ore prices, with earnings in focus as CIMIC shares rallied following better than expected FY16 results and Genworth shares slumped on lower net profit and guidance. Nikkei 225 (+0.5%) was indecisive alongside similar price action in JPY, while Shanghai Comp. (+0.5%) and Hang Seng (+0.6%) were initially dampened after the PBoC refrained from liquidity injections for the 4th consecutive day, before paring losses on late short-covering. 10yr JGBs were initially higher on the back of early safe-haven flows and after the BoJ included 5yr-10yr purchases in today's Rinban operations. However, JGBs then shed its gains in 2nd half of trade as yields resumed their upward trend with 30yr and 40yr yields climbing to their highest in a year.

The BOJ Summary of Opinions from the January 30th-31st meeting stated that Japan's economy has continued its moderate recovery trend and will likely continue at a pace above its potential. The BoJ stated it should be prudent regarding abruptly changing policy and that it observed more positive developments in the real economy including pick-up in exports, an upturn in private consumption and an increase in business fixed investment.

Top Asian News

  • India Signals End to Easing Cycle, Unexpectedly Holds Rates
  • SoftBank’s Stable Japan Business Makes Up for Losses at Sprint
  • Banks Fleeing Risk Whet Kazakhstan’s Appetite for Higher Returns
  • Philippines Lobs Miners Lifeline as Closures Can Be Disputed
  • Bonds Plunge as India Unexpectedly Signals End to Easing Cycle
  • RBI’s Change to Neutral Stance Surprising, Policy Hawkish: Trust
  • China Developer Stocks Priced for Disaster are Bargain

European equities traded modestly in the green with earnings dictating play in terms of stock specific news. ABB and Maersk reside near the bottom of their respective indices after their pre-market reports, while Rio Tinto outperform in the FTSE after today's earnings only to go reconfirm that the commodity slump seen over the past 18 months appears to have ended. A lack of macro newsflow has done little to alter the direction of fixed income markets, with Bunds drifting higher through the session, while the GE/FR 10Y spread continues to widen further as we get closer to the election in France and little in the news gives the impression of a change in momentum for Le Pen. The periphery is also seeing a widening of the spread against the German benchmark, with particular focus on the likes of IT and SP.

Top European News

  • Rio Tinto Posts First Profit Increase Since 2013 on Iron Rebound
  • Sanofi Profit May Fall in 2017 as Drugmaker Seeks New Drivers
  • Oil Falls to Two-Week Low After Data Shows U.S. Stockpile Gains
  • Maersk Slumps as It Unveils Second Loss Since World War II
  • Greece Fights Back Against IMF Criticism on Bailout Targets
  • BOE Sees Inflation Pressures, Expects Consumer Spending to Cool
  • Dunelm Slumps as U.K. Retailer Warns of ‘Transitional Year’

In currencies, the Bloomberg Dollar Spot Index rose 0.2 percent, adding to a two-day gain of 0.6 percent. The currency is still down 3 percent from a Jan. 3 peak. The euro slipped 0.3 percent to $1.0647 and the British pound was little changed at $1.2493. FX markets remain quiet this morning within the G7 amid a lack of fundamental catalysts, although early on in the session USD strengthened against its major counterparts as flows move away from Europe as political woes grip the region. This led the EUR to fall across the board but most notably against the JPY with the cross trading lower by half a percent, in regards to support on the way down the 117.80 level could stem the losses. Later on in the session NZD will be in focus with the RBNZ set to keep rates unchanged, traders and analysts alike will be looking for the accompanying statement and comments from Wheeler, where comments about growth and inflation set to be in focus.

In commodities, oil slid 1 percent to $51.63 a barrel in New York, heading for a third-straight drop amid speculation that rising supply from U.S. shale producers is offsetting cuts by OPEC. Copper three-month forwards jumped 1.5 percent in London.  Gold continues its recent rally to trade at the highest levels since November last year. The psychological USD 1250/oz seems to be in focus and could be the next major level of resistance. Copper has been on the rise after the world's largest mine has stopped production after talks between unions and the mines owner broke down once again. The markets looks to see if these recent issues can push prices up the recent highs of 2.736 and in sympathy all base metals trade higher this morning alongside stellar earnings from Rio Tinto. WTI and Brent crude futures trade lower this morning as market reports suggest that stalling demand from China and inventory levels are rising in the US with the latest API figures reaching 14227k W/W.

Looking at the day ahead, this morning in Europe the sole release comes from France where the Bank of France business sentiment reading for January is due. There’s no data due in the US while the only central bank speak scheduled for today is the BoE deputy governor Jon Cunliffe this afternoon. Earnings wise we’ve got 16 S&P 500 companies due to report with the highlight being Time Warner while in Europe GlaxoSmithKline headlines the releases.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -3.2%
  • 10:30am: DOE Energy Inventories

DB's Jim Reid concludes the overnight wrap

I was going to say that European government bonds are in danger of being the tail that wags the dog at the moment. However this assumes they are a small market threatening to cause wider problems. The reality is that it's a huge market and the recent moves deserve continued scrutiny. Indeed it's one of the great ironies at the moment that just as European data surprises have recently been running at multi-years highs so Euro Government spreads have in several cases been running at or close to multi-year wides versus Germany. At the same time Euro Stoxx volatility is close to two and a half year lows. These divergent signals are something we've been discussing over the last few days with markets trying to work out how much of it is political risk versus how much is the prospect of less QE buying from the ECB going forward.

Our view in our 2017 outlook was that Europe would probably muddle through politically in 2017 but with volatility spikes around the key political events, especially the French election and especially up to and around the first round which we've long felt Le Pen would win. With government bonds behaving as they have it feels like the year is going to plan. However had you told me at the end of 2016 that 10y OATs would hit four and a bit year highs in spread terms versus Bunds in early February I would have expected equity vol to be higher and credit spreads a bit wider. The fact that equity and credit are being relatively well behaved for now perhaps indicates that either government bonds are a pretty cheap tail risk hedge (and not necessarily too concerning a signal at the moment) or that a lot of the price action may be as much to do with the increasing risk of a full ECB taper as we get closer to 2018.

Although yesterday saw a slight reversal of recent sovereign spread widening, French, Italian, Portuguese and Spanish yields hover around 51, 36, 12 and 8 month wides relative to Bunds. Meanwhile Greek 2y yields rose 73bps to 9.463% yesterday after the IMF warned that Greece would fail to hit the budget surplus targets set under the bailout terms by its creditors following its annual assessment. The IMF also warned of a possible “rekindling” of Grexit risk and that “even if the authorities’ policy program stays on tracks, high risks to the baseline remain”.

The findings of the review appeared to spark a bit of war of words. Greek Finance Minister Euclid Tsakalotos said that the IMF’s assessment of Greece’s economy is not representative of the actual effort exerted by the Greek government during the ESM program. Tsakalotos also said that the IMF’s view is “outdated” and based on “overly pessimistic assumptions”. Dutch finance minister Jerome Dijsselbloem added that he would like to have the IMF “on board” for full participation in the Greek bailout programme but that “they must be honest”, saying that “Greece has already had four quarters of economic growth and has had a pretty good recovery at the moment”. A familiar stand-off feeling then and should things continue to remain in a bit of a stalemate through February then it’s possible that things go on hold until after the Dutch election in March.

So while we saw a slight reversal in European sovereign bonds yesterday, it was a much more mixed session for European equity markets. Both the Stoxx 600 (+0.32%) and DAX (+0.34%) edged a bit higher but the CAC (-0.49%) – where the banking sector struggled following softer than expected results for BNP - and FTSE MIB (-0.17%) continued their soft start to the week. Across the pond the S&P 500 (+0.02%) finished a smidgen higher on fairly light newsflow with energy shares dragging after WTI Oil fell back below $52/bbl and to the lower end of the recent range as the focus continues to remain on the prospect of more US shale production. Amazingly the S&P has now also closed with a move up or down of less than 0.10% for the sixth time in the last nine sessions. Low vol at its best.

Meanwhile the notable mover in FX over the last 24 hours has been Sterling which has traded in a near 1.6% range, and is currently settled around $1.250 this morning. Yesterday hawkish comments from BoE policy maker Kristin Forbes (who in fairness is a known hawk) helped the Pound bounce back from early lows after she said that she was growing uncomfortable with the recent growth and inflation trade off and that “if the real economy remains solid and the pickup in the nominal data continues, this could suggest an increase in the bank rate”. Meanwhile on the Brexit front the latest update is the confirmation that PM Theresa May has offered a take it or leave it vote to Parliament on the final draft of an exit agreement with the EU. This comes after May won a vote in Parliament yesterday (by 326 votes to 293) which would have forced her to give more power to lawmakers. Brexit Minister David Davies confirmed that the vote will be a “choice between leaving the EU with a negotiated deal, or not”.

This morning in Asia it’s been a pretty quiet start for the most part. While there’s been gains for the Nikkei (+0.08%) and ASX (+0.50%), the Hang Seng (-0.11%), Shanghai Comp (-0.32%) and Kospi (-0.55%) are in the red. The Yen (+0.30%) has been a notable gainer in FX on nothing more than safe haven buying while markets in Asia are also awaiting central bank decisions in Thailand (no change expected) and India (expected to cut 25bps) this morning and New Zealand (no change expected) later this evening. The main focus has been on the court case hearing between Trump’s administration and the judiciary which has seen sharp exchanges between the judges and lawyers. According to the WSJ a ruling is likely later this week.

Moving on. Yesterday the latest House View, "Politics and policy driving markets", was published. The global macro outlook remains largely unchanged, with global growth picking up only gradually this year as the spillover from better US growth prospects is limited before 2018. The report includes a couple of good pages on the border tax adjustment and its implications, as well as a mark-to-market of Trump’s policies vs. expectations. The team also provide a positioning update on Trump trades as well as a recap of our equity derivatives non-consensus lower vol regime view for 2017.

Before we wrap up, in terms of yesterday’s data, in the US the December trade balance reading revealed a slightly narrower than expected deficit ($44.3bn vs. $45.0bn expected) with exports rising +2.7% mom. The BLS JOLTS report revealed a small 0.1% decline in both the job openings and quits rates in December to 3.6% and 2.0% respectively. Meanwhile later on in the evening the December consumer credit reading showed a smaller than expected increase in credit of $14.2bn (vs. $20.0bn expected). Prior to this in Europe the main highlight of the data was in Germany where industrial production fell sharply in December (-3.0% mom vs. +0.3% expected). Our economists in Germany note that this poses downside risks to Q4 GDP growth (due on 14th February) and therefore potentially results in a weaker starting base for 2017 growth. They do however expect at least a temporary pick-up in production growth in the next months based on recently improved sentiment and already released January car production. Importantly though, yesterday’s release highlights that the surging PMI’s are over predicting hard data.

Looking at the day ahead, this morning in Europe the sole release comes from France where the Bank of France business sentiment reading for January is due. There’s no data due in the US this afternoon  while the only central bank speak scheduled for today is the BoE deputy governor Jon Cunliffe this afternoon. Earnings wise we’ve got 16 S&P 500 companies due to report with the highlight being Time Warner while in Europe GlaxoSmithKline headlines the releases.